Solution Manual for Canadian Income Taxation 25th Edition By William Buckwold, Joan Kitunen, Matthew Roman 2023-2024 1 Solution Manual for Canadian Income Taxation 2022-2023 25th Edition by William Buckwold, Joan Kitunen, Matthew Roman CHAPTER 1 TAXATION― ITS ROLE IN BUSINESS DECISION MAKING Review Questions 1. If income tax is imposed after profits have been determined, why is taxation relevant to business decision making? 2. Most business decisions involve the evaluation of alternative courses of action. For example, a marketing manager may be responsible for choosing a strategy for establishing sales in new geographical territories. Briefly explain how the tax factor can be an integral part of this decision. 3. What are the fundamental variables of the income tax system that decision-makers should be familiar with so that they can apply tax issues to their areas of responsibility? 4. What is an ―after-tax‖ approach to decision making? 2 Solutions to Review Questions R1-1 Once profit is determined, the Income Tax Act determines the amount of income tax that results. However, at all levels of management, alternative courses of action are evaluated. In many cases, the choice of one alternative over the other may affect both the amount and the timing of future taxes on income generated from that activity. Therefore, the person making those decisions has a direct input into future after-tax cash flow. Obviously, decisions that reduce or postpone the payment of tax affect the ultimate return on investment and, in turn, the value of the enterprise. Including the tax variable as a part of the formal decision process will ultimately lead to improved after-tax cash flow. R1-2 Expansion can be achieved in new geographic areas through direct selling, or by establishing a formal presence in the new territory with a branch office or a separate corporation. The new territories may also cross provincial or international boundaries. Provincial income tax rates vary amongst the provinces. The amount of income that is subject to tax in the new province will be different for each of the three alternatives mentioned above. For example, with direct selling, none of the income is taxed in the new province, but with a separate corporation, all of the income is taxed in the new province. Because the tax cost is different in each case, taxation is a relevant part of the decision and must be included in any cost-benefit analysis that compares the three alternatives [Reg. 400-402.1]. R1-3 A basic understanding of the following variables will significantly strengthen a decision maker's ability to apply tax issues to their area of responsibility. Types of Income - Employment, Business, Property, Capital gains Taxable Entities - Individuals, Corporations, Trusts Alternative Business - Corporation, Proprietorship, Partnership, Limited Structures partnership, Joint arrangement, Income trust Tax Jurisdictions - Federal, Provincial, Foreign R1-4 All cash flow decisions, whether related to revenues, expenses, asset acquisitions or divestitures, or debt and equity restructuring, will impact the amount and timing of the tax cost. Therefore, cash flow exists only on an after tax basis, and, the tax impacts whether or not the ultimate result of the decision is successful. An after-tax approach to decision-making requires each decision-maker to think "after-tax" for every decision at the time the decision is being made, and, to consider alternative courses of action to minimize the tax cost, in the same way that decisions are made regarding other types of costs. Failure to apply an after-tax approach at the time that decisions are made may provide inaccurate information for evaluation, and, result in a permanently inefficient tax structure. Buckwold, Kitunen, Roman and Iqbal , Canadian Income Taxation, 2022-2023 Ed. Copyright © 2022 McGraw-Hill Education Ltd. Instructor Solutions Manual Chapter Three 3 CHAPTER 2 FUNDAMENTALS OF TAX PLANNING Review Questions 1. ―Tax planning and tax avoidance mean the same thing.‖ Is this statement true? Explain. 2. What distinguishes tax evasion from tax avoidance and tax planning? 3. Does Canada Revenue Agency deal with all tax avoidance activities in the same way? Explain. 4. The purpose of tax planning is to reduce or defer the tax costs associated with financial transactions. What are the general types of tax planning activities? Briefly explain how each of them may reduce or defer the tax cost. 5. ―It is always better to pay tax later rather than sooner.‖ Is this statement true? Explain. 6. When corporate tax rates are 13% and tax rates for individuals are 40%, is it always better for the individual to transfer their business to a corporation? 7. ―As long as all of the income tax rules are known, a tax plan can be developed with certainty.‖ Is this statement true? Explain. 8. What basic skills are required to develop a good tax plan? 9. An entrepreneur is developing a new business venture and is planning to raise equity capital from individual investors. Their adviser indicates that the venture could be structured as a corporation (i.e., shares are issued to the investors) or as a limited partnership (i.e., partnership units are sold). Both structures provide limited liability for the investors. Should the entrepreneur consider the tax positions of the individual investors? Explain. Without dealing with specific tax rules, what general tax factors should an investor consider before making an investment? 10. What is a tax avoidance transaction? 11. ―If a transaction (or a series of transactions) that results in a tax benefit was not undertaken primarily for bona fide business, investment, or family purposes, the general anti-avoidance rule will apply and eliminate the tax benefit.‖ Is this statement true? Explain.
